Expect consumption growth to remain moderate in FY13: ICRA

ICRA Research Services has come out with its report on FYQ1 GDP numbers. According to the research firm, the negative impact of the sub-par monsoon coverage would be offset to some extent by income support programmes of the Government, nevertheless consumption growth is expected to remain moderate in FY13 on the back of economic uncertainties and persistent high food inflation.

India’s gross domestic product (GDP) at factor cost (constant prices) expanded by a moderate 5.5% in year-on-year (y-o-y) terms in the first quarter of fiscal year 2012-13 (Q1FY13). This was slightly higher than consensus expectations (~5.3%) and the performance in Q4FY12 (5.3%), led by a faster-than anticipated growth of construction (10.9%) and agriculture (2.9%). Although services remained the fastest-growing sector with a growth of 6.9% in Q1FY13, the pace of expansion slipped below 7% for the first time since Q4FY09. GDP growth eased to 5.5% in Q1FY13 from 8.0% in Q1FY12. Despite the robust 10.9% growth of construction in Q1FY13, industrial growth weakened to 3.6% in Q1FY13 from 5.6% in Q1FY12, reflecting the sharp decline in manufacturing growth (0.2% in Q1FY13; 7.3% in Q1FY12) and the moderation in growth of electricity, gas and water supply (6.3% in Q1FY13; 8.0% in Q1FY12). Additionally, mining & quarrying activities displayed a negligible rise in Q1FY13 (0.1%) relative to the mild de-growth in Q1FY12 (-0.2%). Service sector growth moderated to a 13-quarter low of 6.9% in Q1FY13 from 10.2% in Q1FY12, reflecting a sharp slowdown in growth of the trade, hotels, transport and communication (THTC) segment (4.0% in Q1FY13, 13.8% in Q1FY12). The impact of this was partly offset by an improved pace of growth of financing, insurance, real estate & business services (10.8% in Q1FY13, 9.4% in Q1FY12) and community, social & personal services (7.9% in Q1FY13, 3.2% in Q1FY12) in Q1FY13. Notwithstanding a moderation relative to Q1FY12 (3.7%), agriculture & allied activities recorded a healthy growth of 2.9% in Q1FY13, reflecting the robust rabi harvest in 2012. Growth of GDP at market prices (at constant 2004-05 prices) slowed sharply from 9.0% in Q1FY12 to 3.9% in Q1FY13. This was considerably lower than the 5.5% growth of GDP at factor cost in the same quarter, led by a 20% de-growth in indirect taxes less subsidies. Gross fixed capital formation (GFCF) expanded by a marginal 0.7% in Q1FY13, reflecting the slowdown in investment activities as well as an adverse base effect following the 14.7% expansion in Q1FY12. Valuables contracted by 55.4% in Q1FY13 relative to Q1FY12, in line with the moderating demand for gold in recent months. Additionally, the pace of growth of private final consumption expenditure (PFCE) weakened to 4.0% in Q1FY13 from 4.9% in Q1FY12 as high food inflation constrained consumer demand. Data released by CSO indicates that the pace of growth of exports and imports (at current prices) moderated substantially from 29% each in Q1FY12 to 19% and 17%, respectively, in Q1FY13. However, government final consumption expenditure (GFCE) expanded at a faster pace in Q1FY13 (9.0%) relative to the trend witnessed in the previous six quarters. OUTLOOK: To an extent, a benign base effect would support manufacturing growth in FY13. However, a sustainable pickup would depend upon resolution of various policy and regulatory issues as well as improved availability of power for industrial usage. While the sharper depreciation of the Indian Rupee relative to various East Asian currencies may spur import substitution and boost exports, the growth of the latter would be constrained by the weak growth outlook for the Advanced Economies. The pickup in monsoon rainfall in recent weeks would recharge groundwater levels and benefit the rabi harvest in 2013; however, a late withdrawal of the monsoon may not boost sowing or augment kharif yields. In our view, the outlook for agricultural growth for FY13 remains muted. Although the negative impact of the sub-par monsoon coverage would be offset to some extent by income support programmes of the Government, nevertheless consumption growth is expected to remain moderate in FY13 on the back of economic uncertainties and persistent high food inflation. In addition to inflation-related concerns, the likelihood of considerable fiscal slippages suggest a limited space for monetary easing in the near term. Even as interest rates are unlikely to ease significantly, policy uncertainties continue to dampen investment sentiments. Overall, ICRA maintains its expectation of a moderation in GDP growth to 5.7% in FY13 from 6.5% in FY12. Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions. To read the full report click on the attachment

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